Sainsbury's has revealed the cost of keeping some of its prices lower as it posted a drop in annual profits.

The supermarket giant said it is “absolutely determined to battle inflation for our customers” but said this was against a “still uncertain outlook”.

The UK's second largest grocery chain, behind Tesco, reported a five per cent fall in underlying pre-tax profits to £690 million for the year to March 4 as it spent £560m on prices. It said inflation in its stores was less than half that seen across the sector as it also sought to compete with discounters Aldi and Lidl.

The company, which has around 100 outlets in Scotland, said that prices were falling for some products such as milk and fresh food.

However, analysts said it is “tough” for supermarkets as they tackle a different retail landscape since the pandemic and pressures now ranging from rising commodity costs to food shortages.

Zoe Gillespie, investment manager at RBC Brewin Dolphin, said it is a “tough environment for supermarkets”.

She said: “Sainsbury’s is caught between post-Covid normalisation and high inflation, which are simultaneously reducing revenues and cutting into margins.

“That said, compared to where it was three years ago, the company is in a much better position.

“But, it continues to perform reasonably well in the circumstances, with an improving share price, decent balance sheet, and levers to pull – such as the potential sale and lease back of property.”

Neil Shah, of the Edison Group, said that “the supermarket chain is facing tough competition from discounters Aldi and Lidl, who are gaining market share as customers turn to their discount shelves for savings on essentials”.

It comes as food price inflation has hit the highest level for more than 45 years, at 19.1% in the year to March, according to official data, putting households under immense pressure.

Figures from Kantar this week signalled a slight easing in grocery price inflation in April, to 17.3%, from last month's 17.5%, though the report stressed it was too early to call the peak.

Sainsbury's figures showed profits also fell against a previous year that was boosted by pandemic restrictions allowing supermarkets to remain open throughout lockdowns.

Its result was at the top end of previous guidance for between £630m to £690m as like-for-like sales excluding fuel rose 2.6% over the full year, though this was boosted by price inflation, with sales by volume falling.

The group said profits for the year ahead are expected to be between £640m and £700m in a "still uncertain outlook for consumer spending".

Simon Roberts, Sainsbury’s chief executive, said: "We really get how tough life is for so many households right now which is why we are absolutely determined to battle inflation for our customers.

"Our focus on value has never been greater and we have spent over £560m keeping our prices low over the last two years.

“As a result, we are now the best value compared to our competitors that we have been in many years and we are delivering improved market share performance in Sainsbury's and Argos."

He said it is two years into a new food plan and has "focused efforts on reducing costs right across the business".

At the same time, it has improved the performance and profitability of Argos, Tu, Nectar and Financial Services.

He said: “We continue to work closely with our suppliers and farmers and I am grateful for their support in what has been another difficult year for food supply chains.

"We know just how vital the agriculture industry is not only to Sainsbury's, but to the country as a whole and this is why we have made the choice to give £66m of additional support to British farmers over the last year.

"We made these very deliberate decisions and investments because they make our business stronger, but more importantly because they are simply the right thing to do."

Shares in Sainsbury's closed down 3.45%, or 9.8p, at 274.1p.